ULIP Vs ELSS- The Tax-Saving Investment Schemes

In this highly productive generation, In India, the total amount of the Income Taxes can be somewhat reduced by investing smartly in the tax saving schemes. There is a various number of Tax Savings Schemes or Plans from which an individual can choose. These tax-saving options are provided by many Government and Private Organizations to the Indian Residents. There are multiple numbers of opportunities to reduce an individual’s tax burden, out of which the ULIP and the ELSS are one of the best tax-savings schemes introduced in India.

In this article, we are going to provide you a brief description of this schemes and compare the features and different qualities of these tax- saving schemes.

ULIP Saving Schemes

The ULIP stands for Unit Linked Insurance Plan. This is a product that is offered by the Insurance Companies, unlike the Insurance Policy it gives the investors both Insurance and Investment under a single integrated plan. It allows a maximum exemption of Rs 1 Lakh per year under the Section 80 C.

In short, ULIP is a life insurance product, which provides a risk cover to the policyholder along with the investment options to invest in different qualified investments such as stocks, bonds or mutual funds. This provides a dual benefit of Investment Opportunity along with the Insurance Coverage.

ELSS (Equity Linked Savings Schemes)

The ELSS stands for the Equity Linked Savings Schemes. These are the tax- saving mutual funds that can be used to reduce the taxable income by up to 1.5 Lakhs under the Section 80C of Income Tax Act 1961.

It is a type of diversified equity mutual fund and offers capital appreciation as well as tax benefits. It comes with a lock period of 3 years.

Differences between the ULIP and ELSS

People get confused often with these two products as both the schemes are tax-saving instruments.

ULIP Vs ELSS

The ULIP is an Insurance cum Investment product which is sold by the Insurance Companies. The ULIP Investors have an option to invest in equity, hybrid and money market funds. The minimum sum assured is 10 times the annual premium. It is seven times the annual premium if the age of entry is above 45 years.

Whereas the ELSS is an equity-linked saving scheme, these are the diversified equity funds that invest in stocks. These are pure investment schemes and they do not provide any insurance.

Charges and Transparency

The ELSS Funds have only one charge, which is called as the fund management fee or the expense ratio. This is around 3% and is adjusted in the Net Asset Value of the Scheme. This is not charged separately. Through this, you get to know that how much amount you have invested and you can also calculate the return, leading to a high transparency in the transaction process.

In ULIPs, almost 60% of the charges are incurred in the premium allocation charge, mortality charge, fund management fee, policy administration charge, fund switching charge and service tax deduction. The rest amount of the money is invested in the market. As the charges start reducing after 3-4 years, the investment and the returns will be very low.

For getting good returns you need to stay in an investment period of 10-15 years. The transparency is too low as you do not know the exact amount that is being invested. Also, there are some charges that are levied by reducing the units, not deducting from NAV, but further reducing the transparency.

Tax Deductions

Both the instruments are eligible for the tax deductions of up to Rs 1.5 Lakh under the Section. The ELSS scheme follows the EEE mode, wherein, the investment, capital gains and maturity amount are tax-free. These are because you are locked-in for 3 years, resulting in the long-term capital gains, which provides zero taxation for the equity investment.

In case of ULIPs, if you surrender before the lock-in period, any deduction claimed earlier is reversed as you have to pay tax. The maturity amount is tax-free only if in case of the death of the Policy Holder. But if the premium is more than 10% of the assured sum, then the maturity is added to the insured income and taxed at an applicable rate. If the premium is more than 10% of the assured sum then the proceeds for a year exceed Rs 1 Lakh and a tax of 2% is deducted from the source.

Lock-n Period

The ULIPs have a lock-in period of 5 years, whereas ELSS has a Lock-in period of 3 years. If you cannot quit the ULIP, then you can discontinue the premium. A discontinuance charge is levied and the funds (balance amount) are moved to the discontinuation fund.

In ELSS Funds, you cannot withdraw the amount before 3 years. It is not advisable to quit the ULIP or ELSS after the lock-in Period because the returns are more beneficial if the equity investment terms are for a longer period of time such as 7-10 years. For ULIPs, the ideal period is 10-15 years.

Switching Option

The ULIPs offers a switching option, which means that you can alter the ratio of the invested amount in different funds (equity, debt hybrid etc.) The scheme allows you to shift the funds on the basis of the risk exposure at different stages of life. So while you are young, you can have a higher amount of equity, but along with the age, you can switch the funds. You can also switch the funds if there is a decrement in the market.

In case of ELSS, there is no switching option. You are not allowed to touch the funds before the lock-in period. But you can opt for the dividend option to ensure the periodic booking of the profits.

Other Comparisons

Features

ULIPs

ELSS

Concept

It is an Insurance cum Investment Product

A pure Investment product

Objective

This is an investment product that provides leverage to enjoy the investment benefits along with the tax relief along with the life coverage.

A professionally managed fud that provides the benefits from the diversified equity investments.

Regulator

IRDA

SEBI

Loyalty Additions

The Loyalty additions are applicable for staying invested through the policy term depending upon the policy terms and conditions

There is no such loyalty additions applicable.

Risk

High Risk, Capital and Return are not guaranteed but life coverage is guaranteed

High Risk, returns depends on the performance of the broader markets and fund manager.

Thus, if you are looking for a short-term investment with a good growth option then ELSS is a good option. As the returns expected from the equity market is comparatively higher than that of the investment classes.

But if you wish to maintain an investment in order to meet your personal needs such as children education, marriage etc. then choosing ULIP is a good option. As the ULIP provides a long-term investment for a period of 12-15 years. It also provides an insurance coverage, which in result provides an overall security and protection. Hence while choosing a ULIP or an ELSS, one should always keep in mind about the Financial Goals and Investment objective.